Hello and welcome to FundooMoney, your 24X7 buddy for all your money matters. Unit linked insurance plans (Ulips) offered by life insurance companies are financial products that provide a combination of life insurance and a market-linked investment, especially in equities. The investment can potentially provide high growth during the long tenure of the Ulip. What’s more, you get annual tax deduction of upto Rs 1.5 lakh for your premium.
Given the long tenure of Ulips, typically stretching from 10-25 years, any person thinking of investing in Ulips, needs to evaluate its appropriateness in meeting specific future needs. But there is one more area that one needs to take a close look at—the charges.
Ulips have charges and like any product with charges, they make a dent on the returns i.e. you get to earn and save less. Thanks to interventions made in the recent years by the insurance regulator, Insurance Regulatory and Development Authority (IRDA), Ulip charges have come down but they are significant enough for any potential investor to take a very close look.
So, what are these Ulip charges? We will tell you all about them but in just a little while.
Here are some important charges Ulips typically have. The amount of charges varies from one Ulip to another, and among life insurance companies.
Premium allocation charges This is the first charge that is levied on your Ulip. It is a percentage of your annual premium. This is basically done to recover the cost of distribution, commission payment, underwriting and so on. The charge is typically higher in the initial part of the Ulip, mostly in the first year.
Policy administration charges To service the policy and to meet the administrative expenses, administration charge is levied. It is a percentage of the annual premium and deducted on a monthly basis. The charge is higher in the first five years of the Ulip term. Then, it is discontinued or charged at a lower rate.
Fund management charges This charge is for availing the investment expertise of the fund manager and the fund management team. Over the years, this charge has come down substantially and for many new Ulips, this is around 1.35% for equity funds and 0.75% for debt funds.
Mortality charges This charge is for the life insurance coverage provided by the Ulip and is deducted on a monthly basis from your money with the life insurance company. This is mostly charged based on sum at risk for the life insurance company. So, with time, as you pay more premiums, your money grows and savings increases, the mortality charge comes down.
Discontinuance charges While Ulips have a 5-year lock-in period, you can discontinue the policy even after paying the first premium. Of course, as we have said, you will have to wait out the lock-in period to get your money. Once you surrender your policy during the lock-in period, your money is shifted to a discontinued fund and stays there till the completion of the lock-in period. A charge is also levied for discontinuance of the policy.
A potential investor in Ulip needs to be aware of the existence and the impact of all these common charges. Don’t fall for marketing spiels by some people selling Ulips who project abnormally high returns for Ulips. IRDA allows sales illustrations for 4% and 8% returns only. The high returns projected by some could be a way of masking the impact of the charges.
Above all, an investor needs to ask whether the charges are justified for the benefits being provided and whether the features will fulfill the person’s specific needs.
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